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Category Archives: Sound Money

– In 2012, the Bundesbank (the central bank of Germany) asked to visit the vault of the Federal Reserve in New York, to view the 1,536 tons of gold they have stored there.
– The Federal Reserve told them no. They were not allowed to see their gold.
– In response, Germany said that they wanted 300 tons of their gold back.
– The Federal Reserve said that they’d need seven years to get the gold back to Germany. (Something that should take them seven weeks, tops.)
– One year later, the Fed has returned only 5 tons of gold to Germany. At this rate, it will take 60 years for the Germans to get less than one fifth of their gold back.

– The original German gold held in the U.S. is gone. Leased, sold and rehypothecated many times over.
– Germany now wants its gold back. The U.S. balks and promises to only return roughly 40 mts/year for eight years. (By the way, why didn’t France return any gold in 2013? Germany’s looking for 374 metric tonnes from them and, in 2013, it got zilch, zero and nada.)
– Pressed to come up with gold to ship back to Germany, the U.S. scours it’s vaults.
– The U.S. takes some of it’s 1930s-confiscated “coin melt” gold, assayed at 90% purity, and recasts it into 99.5% purity London bars and ships them off to Frankfurt.
– The Bundesbank books in these new bars, apparently date-stamped “2013″, as a “return of German gold” and now awaits the other 95% of their “order”.

In July 2013, the US American hedge-fund manager William Kaye created a stir when he picked-up the ball, stating:

” Germany won´t ever see its gold again…… Central Banks, such as the FED, where most of the reserves had been deposited, had lent the gold to U.S. Banks such as Goldman Sachs and JP Morgan.

The gold has been used in the market to lower the gold price and the FED has received securities in exchange…. Germany won´t ever see that gold again, because it is safely kept in my accounts and the accounts of our investors”.

I have no ego tied up with being right on this. I’d rather be successful than right.

But I do think Gary North gets a few things wrong:

– “Nobody is going to be getting rid of an asset that has moved from $2 to $1,000 in one year in order to buy pizzas. People want to hang onto it, refusing to sell, in the hopes that it will go to $2,000.”

According to the data reported by merchant processor Bitpay, they see an INCREASE in commercial transactions when the price rises. Not a decrease.

– “In order for Bitcoins to become an alternative currency, there will have to be millions of users of the currency. There will have to be tens of millions of users of the currency. They will have to develop in a market on their merit as money, not as an investment of dollars in order to get more dollars back.”

There are currently hundreds of thousands, and I think that’s enough. It’s often easier to spend bitcoins than dollars. The albeit small market during the libertarian conference “Porkfest” has changed from using silver coins to bitcoins. That’s the free market choosing, though admittedly, it’s a small example.

– People are not buying it to serve as money; they are buying it because they are in the midst of a mania,

I’m sure this is true for the latest rally, but if you look back a year at what the bitcoin community thought the price would be, their predictions are actually pretty modest. It seems clear to me that they prefer bitcoin for its properties as a unit of account/medium of exchange. Not as an investment.
https://bitcointalk.org/index.php?topic=211874.msg2221868#msg2221868

– “Bitcoins are not increasing the division of labor.”

I issued stock in a book. I did it without an army of lawyers and a small fortune. Bitcoins hugely increase the division of labor. You don’t need a paypal or western union in between you and the recipient of your payment.

One surprise (for my American mentality) is that dollars are not the biggest, nor second biggest monetary supply in terms of value. They are third or fourth biggest depending on whether one considers M2 or M1.

Please note, the data is imperfect: the M1 data is newer than the M2 data, but the difference in M2 versus M1 ranking also speaks to great differences in banking structure and practices in various countries.

The main difference between M2 and M1 is that M2 includes savings and money market accounts. The proportion of M2 to M1 varies widely between countries. Though the ratios may be off because some data is older than other data, in the United States, M2 is more than five times bigger than M1. In Luxembourg, it’s only 1.3 times bigger. In Saudi Arabia, it’s 1.5 times bigger.

COMPARING M2 WITH CYPTO CURRENCIES

As of the time of this writing (September 7th, 2013), all the Bitcoins in the world are worth about $1.39 Billion. That makes their supply slightly less valuable than the M2 monetary supplies of Chad, Guyana, Montenegro, but slightly more valuable than the M2 monetary supplies of Mauritania, the Maldives, Belize, El Salvador, Malawi and Tajikistan. Bitcoins are on the map!

All the Litecoins in the world are worth about $59 million dollars, which is a little better than half the value of the smallest M2 monetary supply reported by the World Bank, that of Sao Tome and Principe.

MEASURING VALUE PER NOTE

The methodology behind this last analysis is speculative, but interesting nonetheless. What if we measured the value-per-note of all mediums of exchange? What if we counted all the notes in the world (Dollars, Euros, Litecoins, Vietnamese Dongs, Yen, Rubles, Lira, etc), and then counted the value of all the notes. For any currency, we could then compare their percentage of world-wide notes to their percentage of value of all the monies.

For example, imagine a world in which only two mediums of exchange were used: Roman’s Rubles and Mises’s Marks. Imagine that a million of each circulated, but Mises’s Marks were three times as valuable as the Rubles.

It’s easy to quantify the difference. Mises’s Marks represent three quarters of the value and only half of the notes. This can be described by a factor of 1.5. Roman’s Rubles also represent half the notes, but only one quarter of the value. They can be given a factor of 0.5.

A real-world example would be comparing Vietnam’s money, the Dong to the Euro. Taken note for note, the Dong represents a quarter of all the money in circulation, but only 0.15% of the value (when considering M2). The Euro is almost the exact converse. Euros represent 0.15% of the notes, but a quarter of value of all mediums of exchange in this analysis.

What conclusions be gleaned from this data? Most interestingly, is this factor (percent of value divided by percent of notes) in any way measure trust?

Several methodological concerns come to mind:

1) Aggregating all mediums of exchange, including Tide, gold and pig tusks (used as a medium of exchange on Pentecost Island in Vanuatu) seems like the best approach. In this analysis, only M2 data and the two most valuable crypto currencies, Bitcoin and Litecoin, are considered.

2) How would gold be incorporated into this analysis, since there is no single obvious unit to represent a note? People trade in grams, ounces, bars, tonnes.

3) Should crypto currencies be compared with M2, M1, or not at all? The ranking of trust factors was similar for M2 data and M1 data.

4) Can value per note be a meaningful measure of trust or anything else? Perhaps monetary discipline? What correlations can be found with this ratio?

With these concerns in mind, here is a list of the most and least trust monies using M2 data:

MOST TRUSTED

1. Bitcoin

15,589

2. Kuwaiti Dinar

456

3. Litecoin

370

4. Bahraini Dinar

345

5. Oman Rial

337

6. Latvian Lats

245

7. U.K. Pound

198

8. Jordanian Dinar

183

9. Euro

172

10. Azerbaijan Manat

166

11. Swiss Franc

140

12. US Dollar/Bahamian Dollar/Panama Balboa

130

13. Australian Dollar

118

14. New Zealand Dollar

104

15. Singapore/Brunei Dollar/Libyan Dinar

102

China’s Renminbi: 21.2
Japanese Yen: 1.3

CLOSEST TO PROPORTIONAL TRUST

(% money supply = % value of money supply)

Sri Lankan Rupee 0.987
Icelandic Krona 1.090

LEAST TRUSTED

1. Iran

0.0052

2. Vietnam

0.0061

3. Sao Tome Principe

0.0070

4. Indonesia

0.013

5. Belarus

0.015

6. Laos

0.017

7. Paraguay

0.029

8. Sierra Leone

0.030

9. Cambodia

0.032

10. Uganda

0.050

CONCLUSION

Though the Bitcoin economy may still be small, the fact of it being larger than many national monetary supplies — after only five years, no less — makes its dismissal by lingering critics downright silly. (Not that the “honey badger of money” cares much about its critics.) The value-per-note analysis is even more surprising. If indeed the relative trust of various currencies can be measured by comparing value-per-note, then Bitcoin is already the champion (precious metals not considered), and Litecoin is threatening to take second place.

It’s blowing my mind almost every day. Not only does it threaten the end of government money, it opens up myriad other possibilities — micro transaction to fund content, using the block chain to cryptographically verify first-creation of document, separating the holy trinity of commerce (ownership, identity, trust) into discreet entities. Bitcoin is going to be very, very big and everybody should be keeping an eye out.

Yes, there is a significant barrier to entry — difficult to use, difficult to buy Bitcoins with what I’m excitedly calling “legacy currencies”, not popularly accepted, the threat of loss or theft. Fear not, entrepreneurs are throwing themselves at all these problems — building civilization, as entrepreneurs always do.

The price of bullion is not set in the physical market where individuals take delivery of bullion purchases. It is set in the paper futures market where short selling can drive down the price even if the demand for physical possession is rising. The paper gold market is also the market in which people speculate and leverage their positions, place stop-loss orders, and are subject to margin calls.

When the enormous naked shorts hit the COMEX, stop-loss orders were triggered adding to the sales, and margin calls forced more sales. (Read more)

For Bitcoin newbies, imagine Bitcoin as a gigantic ledger. Every bitcoin wallet has a copy of this ledger. So if I was running a standard Bitcoin wallet on this computer — then this computer would have on it a copy of all Bitcoin transactions, ever. Yes, ALL of them.

Decentralization is important because there’s nothing for Bitcoin’s enemies to shut down.

When you make a bitcoin transaction, you can add a little text to it, like a memo on the check you write.

When the mysterious Satoshi Nakamoto, who invested Bitcoin, made the first entries in the ledger, he wrote that newspaper headline:

January 3, 2009, Times of London; “Chancellor on brink of second bailout for banks”.